Brazil's Breadbasket Teeters With Economic Meltdown

posted on April 17, 2009

FATIMA DO SUL, Brazil (AP) - A year ago, Brazil's breadbasket saw what resembled a gold rush as farmers scrambled to increase acreage amid record demand for soy. Today, much of the region is on its knees, victim of a double whammy of a financial crisis and a punishing drought.

Standing in his field of withered soy, Antonio Gallego oversees a few farm hands harvesting a crop that grew to just 8 inches (20 centimeters) instead of the normal 6 feet (2 meters). He says he'll lose $40 per acre ($100 per hectare) on this year's investment.

"This year is just a total loss, and the only thing we can say about the future is that it's uncertain," said Gallego, 43, son of the first settlers to farm this little-developed corner of Brazil a few decades ago. "I can't increase acreage because there's no credit. But if I decrease, I can't pay the bills."

Early last year, high oil prices, low food reserves and growing consumer demand in developing nations sent food prices soaring, causing riots from Haiti to Pakistan. As in other agricultural regions, Brazilian farmers and ranchers drove to increase production, raking in huge profits as soy and other commodity prices skyrocketed.

Today, grain and beef prices have plummeted. And with sharply reduced foreign orders for Brazilian iron ore, steel and automobiles, Latin America's largest economy could fall into recession this year.

In this sun-baked town with no traffic lights, where tractors and harvesters rumble down the main drag, most farmers say they are losing money on yields from 20 percent to 60 percent below normal.

After the financial crisis hit last fall, the area suffered its worst drought in more than 20 years, affecting three of Brazil's five top grain-producing states and large swaths of grain-producing land in Argentina and Paraguay. There was no rain for two months.

Some families who have farmed fields for 30 years fear they will lose their land. Tight credit is making it harder for most to buy seeds, fertilizer and machinery.

"Some of them are going to go broke," said Eduardo Riedel, vice president of the leading agribusiness industry association in Mato Grosso do Sul state, a seemingly endless stretch of fields and pasture bordering Paraguay and Bolivia. "The lenders are scared about lending the money, there's loss of income, and the middle rural class isn't investing."

Demand has plunged for Brazilian beef, coffee and soy, which is used worldwide as animal feed and as a key additive in cereal, pasta and other processed foods. The credit crunch also has made it difficult for importing countries to get loans to buy food.

The nation's current soy harvest is expected to generate 58 million metric tons, down from 60 million last year. Meanwhile, beef exports for January and February totaled 171 million metric tons, down sharply from 230 million metric tons shipped abroad for the same period in 2008.

The price of milk farmers in Fatima do Sul get from dairies since the crisis hit has dropped to 22 cents per quart (liter), below the production cost of 27 cents per quart (liter).

And dozens of slaughterhouses hit by the credit crunch in recent months have shut their doors in both Mato Grosso do Sul and the neighboring agricultural powerhouse state of Mato Grosso, throwing thousands of meat cutters out of work.

Farmers in the U.S., Canada and Europe are hurting as well from sharply lower prices for soy, corn and beef. But experts say they generally don't hold as much debt as their Brazilian counterparts, giving them greater leeway to ride out the crisis. And many benefit from government subsidies the Brazilians don't get.

"American farmers are perceiving Brazil to be less of a competitive threat than they used to," said Mike Woolverton, a professor of agricultural economics at Kansas State University.

No one expected such a sudden drop from the agribusiness boom that sent Brazilian land prices skyrocketing and drew busloads of American and Argentine investors looking to snap up farmland just before the meltdown last fall.

Gone, too, are carloads of Brazilians barreling down highways along soy fields and cow pastures to spend newly earned profits at a duty-free border paradise in Paraguay, where they snapped up computers, cameras, wine and champagne with strong currency that has since slumped against the dollar.

The economic crisis even is starting to dent previously sky-high popularity ratings for President Luiz Inacio Lula da Silva. Farmers are angry at his claims that the country won't be hit as hard by the meltdown as Europe and the United States.

While economists predict Brazil's economy won't expand at all this year or will contract, Silva's administration in March predicted 2 percent growth and just reduced the forecast to 1.2 percent - figures that Fatima do Sul residents call fantasy.

Sales of veterinary supplies for cows fell so much in recent months at Vair Firmino's small main street store, he reduced his stock by more than half and decided to sell cowboy boots, jeans and three different types of chicks, which he displays in sidewalk cages to attract shoppers.

Silva "says there's no crisis, but just ask a rancher what he's getting for his cows," Firmino said.

Rancher and soy farmer Alberto Dalben, who heads Fatima do Sul's association of farmers, said ranchers used to be able to buy three cows to raise after selling one to the slaughterhouse. Now they get less than two.

About 90 miles (140 kilometers) west in the city of Ponta Para bordering Paraguay, the crisis prompted Brazilian and foreign investors to cancel plans for a $300 million distillery to turn sugarcane into ethanol, said Ponta Para Mayor Flavio Kayatt.

Kayatt and others predict most farmers will survive the downturn that some experts say could last two years, though indebted farmers could be forced out. The rest, they say, will make less money and reduce investments until signs of a global recovery emerge.

Dalben says he may reduce his soy acreage and increase the size of his cattle pastures on his 2,270 acres (920 hectares) because raising cows requires less investment and work than soy, though the returns are often lower.

"We produce food and people will never stop eating," Dalben said, "but they'll eat less and that will affect us."

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